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CF Industries: $3 Billion Share Repurchase Program

November 27, 2012 | About:
CF Industries Holdings Inc. (CF) headquartered in Deerfield, Ill., through its subsidiaries is a global leader in manufacturing and distribution of nitrogen and phosphate products, serving both agricultural and industrial customers. CF Industries operates world-class nitrogen manufacturing complexes in the central U.S. and Canada, conducts phosphate mining and manufacturing operations in Central Florida, and distributes plant nutrients through a system of terminals, warehouses, and associated transportation equipment located primarily in the Midwest.

Valuation

CF is currently trading at a trailing 12 months P/E of 7.54 and a trailing 12 months EV/EBITDA of 3.70. CF delivered a ROE of 37.3% over the past 12 months and a five-year average ROE of 30.2%.

Financial and Business Risks

CF is in a net cash financial position with gross debt-to-equity ratio at a manageable 29%. This does not include $1.4 billion of purchase obligations — minimum commitments to purchase natural gas valued based on prevailing market-based forward prices at 2011 year end.

CF is dependent on North American natural gas, whose prices are volatile. The price of natural gas in North America has been highly volatile in recent years. During 2011, the average daily closing price at the Henry Hub, the most heavily-traded natural gas pricing basis in North America, reached a high of $4.92 per MMBtu on June 9, 2011 and a low of $2.83 per MMBtu on Nov. 23, 2011.

CF utilizes natural gas derivatives to hedge our exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen based fertilizers, in order to manage financial exposure to commodity price and market fluctuations. CF's use of derivatives can result in volatility in reported earnings due to the unrealized mark-to-market adjustments prior to the purchase of the natural gas.

Business Quality and Capital Allocation

CF is North America’s largest and world’s second largest nitrogen fertilizer producer and third largest phosphate fertilizer producer among public companies. Strong agricultural and fertilizer fundamentals are expected to continue. Demand growth for nitrogen is underpinned by strong agricultural fundamentals and its non-discretionary application leads to consistent consumption. In addition, tight projected stock-to-use ratios of 5.6% and high prices across crops and regions support nitrogen demand.

Significant shale gas discoveries and exploration and drilling advances have changed the face of the global nitrogen industry, and CF is positioned ideally to benefit from the change and is investing to increase total nitrogen capacity significantly. CF Industries has strategic operational and capital advantages such as low natural gas costs and good distribution and logistics infrastructure in North America. CF announced approval of projects totaling $3.8 billion to expand nitrogen capacity.

CF has paid dividends every year since 2005 with a current dividend yield of 0.77% with a corresponding dividend payout ratio of 5.7%. Dividends are paid quarterly. In August 2011, CF announced that the board of directors has authorized the expenditure of up to $1.5 billion to purchase shares of the company's common stock through Dec. 31, 2013, which was completed in 10 months and reduced share count by 13% at an average price of $156.8. CF's current $3 billion authorization will last through 2016.

Conclusion

CF is attractively valued, supported by a strong net cash financial position and a potentially value-accretive $3 billion share repurchase program.



Disclosure


The author does not have a position in any of the stocks mentioned.

About the author:

Mark Lin
Mark is a private value investor and runs the Cheapskate Investing website which borrows from the wisdom of value investing giants, using a systematic quantitative screening approach to filter the global stock markets for cheap cigar-butts and wide-moat compounders. He is also a regular contributor to various value investing communities.

Visit Mark Lin's Website


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